Qualified Remodeler Magazine

JUN 2017

Qualified Remodeler helps independent remodeling firms to survive, become more professional and more profitable by providing must-have business information, namely best business practices, new product information and timely design ideas.

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Page 35 of 60

could just look at the subtotals of those five or six items," Hanbury says. "And then each month you can look at the percentage that goes with it, and see if it's tracking much higher than it was before or about the same, without having to memorize what every dollar amount should be." OWNER COMPENSATION Overhead pays the wages and benefits of employees who work in the office, such as receptionists and salespeople, but not for company staff on the jobsite. Insurances and taxes that must be paid on employees—for example, workers' compensation—belong in overhead only when they apply to staff not in the field; for employees on the "ey need to be paid in overhead first if they don't work in the field," says Shawn McCadden, remodeling industry consultant and owner of Remodel My Business. "ey need to be paid for what they do to run the business, and then the net profit is the return on their investment in the busi- ness—for the risk it takes—and not for the owner's efforts." McCadden suggests net profit and owner compensation each should represent at least 10 percent of the sales vol- ume for a company. Owner compensation contains not only salary but also bonuses and any other job benefits. For example, the owner of a company with a $1.5 million volume might make $110,000 in W-2 wages and another $40,000 to $50,000 in benefits, such as 401(k). "e other way is you take your highest-paid person, whether it's a salesperson or a production manager, and you better be making at least 20 percent more than they are," Hanbury notes. "If you're not, then you're subject to an IRS audit. What sense does it make to work that hard with all that risk and not make at least 20 percent more than your highest paid person?" Remodelers Advantage has its members integrate their draws and distributions, which belong on the company balance sheet, into their overhead expenses for monthly reports so the group can better measure business profit- ability. "ey'll have their salary on the P&L, but they won't have their draws and dividends, so they get an inflated sense of net profit," Downing says. FUTURE PROPOSITION Remodeling companies must invest in infrastructure, such as computer systems and automobiles, to run their business. ese expenses filter into overhead unless they contribute directly to labor on the jobsite; for example, the work truck a carpenter drives to the jobsite would be classified as a job cost, but the company car a marketing director drives to the office qualifies as overhead. Even though the business might have already paid for these items, they will depreciate over time and require periodic maintenance until the company replaces them. Setting aside overhead dollars for upkeep and creating account funds for eventual replacements can help remod- elers meet financial obligations in the future, and the larger overhead requires remodelers to increase their markup as the business grows. "We actually started putting in overhead expenses for an entire office two years before we left the base- ment. By the time we left, we had over $125,000 in the bank, so we were able to buy a space, outfit it the way we wanted it and still have a few bucks left over," Hanbury says. "And our pricing strategy had to go up before we actually made this big jump, so then we didn't have to scramble to see if we could actually get that kind of markup when we were required to mark up that much." Remodelers must know their overhead before marking up their direct costs to cover both their overhead and their targeted net profit. You really can't figure out what your pricing strategy is until you know your overhead. – Alan Hanbury, House of Hanbury Builders Direct Costs or COGs Overhead or G&A Net Profit TOTAL SALES VOLUME jobsite, these items need to be figured into the labor rates when estimating direct costs. Remodeling business owners often fail to include a salary for themselves in overhead that indicates their value to the company. Some remodelers intentionally enter a low number, usually on advice from their accountant, because claiming less W-2 income helps keep their taxes down, Hanbury explains. e IRS, however, frowns on business owners who earn a salary lower than their highest-paid employee, he adds. QualifiedRemodeler.com QR June 2017 35

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